Insider trading defences

Insider trading offences are difficult to prove.

In a recent paper on the continuing problems of proof in insider trading cases, one
commentator (M.Duffy) summarised the challenges:

Regulators will often find themselves in a position where they can identify a
person with inside information on a particular security, a person who traded in that
security, a relationship between the two persons and even evidence of communications
between them (such as telephone records).

This may still not be enough unless there is some evidence of the content of the
communication.

Though a circumstantial case for communication may exist, it is usually necessary
to establish what was said to identify it as price sensitive information.

Common statutory defences in Australia

There are a number of statutory exceptions to this law (Section 1043B-J of the
Corporations Act) which relate to specific types of financial products. These include
exceptions for insurance underwriters and the revealing of information under legal
obligation.

Underwriter defence

Section 1043C provides an exception for underwriters applying for or acquiring
securities or managed investment products under an underwriting agreement and disposing
of securities or managed investment products acquired under and agreement.

Chinese wall defence for body corporate

Section 1043F provides an exception for body corporate that enters into a
transaction or agreement merely because of information in the possession of an officer
or employee of the body corporate provided the following three factors are present:

The decision to enter into the transaction or agreement was taken on its behalf
by a person or persons other than that officer or employee; and

It had in operation at that time arrangements that could reasonably be expected
to ensure that the information was not communicated to the person or persons who made
the decision and that no advice with respect to the transaction or agreement was
given to that person or any of those persons by a person in possession of the
information; and

The information was not so communicated and no such advice was so given.

Chinese wall defence for partnerships

Section 1043G provides an exception for partnerships who enter into a transaction or
agreement merely because one or more (but not all) of the members, or an employee of
the partnership, are in actual possession of information if the following three factors
are present:

The decision to enter into the transaction or agreement was taken on behalf of
the partnership by any one or more of the following persons:

(i) a member or members who are taken to have possessed the information merely
because another member or other members, or an employee or
employees of the partnership, were in possession of the information;
(ii) an employee or employees of the partnership who was not or were not in possession
of the information; and

The partnership had in operation at that time arrangements that could reasonably
be expected to ensure that the information was not communicated to the person or
persons who made the decision and that no advice with respect to the transaction or
agreement was given to that person or any of those persons by a person in possession
of the information; and

The information was not so communicated and no such advice was so given.

Knowledge defence

Section 1043H of the Corporations Act provides that a person does not commit the
offence of insider trading by entering into a transaction or agreement in relation to
financial products issued by another person merely because the person is aware that he
or she proposes to enter into, or has previously entered into or proposed to enter
into, one or more transactions or agreements in relation to financial products issued
by the other person or by a third person.

Section 1043I provides an almost identical defence for a body corporate

There is also an exception where the communication of the information is done by a
publisher in their usual course of business, with no intent to contravene this law.
(Section 1044A of the Act)

where to next?

If you suspect that you may be under investigation, or if you have been charged with an offence, it is vital to get competent legal advice as early as possible. Our lawyers are highly specialised in corporate crime and will be able to guide you through the process while dealing with the various authorities related to your matter.